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11 May 2009
Eurohypo's senior debt and bank financial strength ratings affirmed
New York, May 11, 2009 -- Moody's Investors Service today downgraded its ratings on various hybrid
instruments of different Commerzbank Group entities. At the same
time, it affirmed Eurohypo AG's D bank financial strength
rating (BFSR), A1 senior unsecured debt and deposit ratings and
A2 subordinated debt rating. The outlook on these ratings remains
negative. Eurohypo AG's Prime-1 rating for short-term
liabilities was also affirmed.
Today's rating actions followed announcements that the European Commission
has given approval for state aid under certain preconditions, including
that (i) Commerzbank should dispose of Eurohypo AG within five years and
(ii) Commerzbank and its subsidiaries should only make any profit-related
payments on hybrid capital instruments such as silent participation and
profit-participation certificates if they are obliged to do so
without reversing accruals or special reserves under 340g of the German
Moody's says that the announcement regarding the divestment of Eurohypo
has no impact on the ratings of Commerzbank AG. Although Commerzbank
will need to divest a business that currently exerts downward pressure
on its own BFSR of C-, the rating agency argues that positive
credit implications from this divestment, if any, will only
be determined closer to the time of the sale, and will depend on
the terms and conditions of the transaction.
EUROHYPO'S D BFSR AND SENIOR DEBT RATINGS
Despite Moody's expectation that Eurohypo is subject to a future
divestment, the rating agency has not changed the bank's A1
senior unsecured debt and deposit ratings which remain subject to a negative
outlook. The current rating level reflects Moody's view on
ongoing parental support which is underpinned by a profit & loss transfer
agreement obliging Commerzbank to absorb Eurohypo's losses (based
on local GAAP accounting) until at least mid-2012. This
should offer Eurohypo assistance through a period that Moody's expects
to be very challenging for the bank, given the sharp deterioration
in international commercial real estate markets.
However, the A1 senior debt and deposit ratings and the A2 rating
for subordinated debt face heightened pressure in the medium term as the
probability of parental support (currently "high") is expected
to diminish after 2012, potentially reducing the uplift that the
ratings receive from Eurohypo's current Ba2 baseline credit assessment
(which maps directly from the D BFSR). Moreover, Moody's
will closely monitor Eurohypo's scaling down of its core businesses,
which over time may result in a lowering of the rating agency's
assessment of the currently high probability of the bank receiving systemic
support in the event of need. That said, Eurohypo's
prominent position as an issuer of German covered bonds (Pfandbriefe)
would make it a likely candidate to receive systemic support in the medium
term, assuming that both of its main business lines, i.e.
commercial real estate and public sector finance, will remain part
of Eurohypo AG.
DOWNGRADE OF HYBRID INSTRUMENTS RATINGS
Following the previous downgrade of Commerzbank Group's hybrid capital
instruments on 2 March 2009, Moody's today further downgraded
the ratings on the silent participation and profit participation certificates
of Commerzbank and its subsidiaries. The ratings on the various
hybrid instruments now range from Baa3 to Caa1 reflecting Moody's
instrument-by-instrument assessment of the various underlying
terms and triggers.
For all instruments except those issued by HT1 Funding Trust GmbH and
UT2 plc, Moody's understands based on issuer feedback that
coupons for financial year 2008 have been -- or will be -- paid
in full, and that the major risk of coupon deferrals or omissions
applies to financial years 2009 and 2010. Moody's also understands
that any (special) reserves on the balance sheets of Commerzbank and Eurohypo
will be reversed, as necessary, in order to prevent the potential
triggering of principal write-downs. These reversals would
not be acceptable to avoid coupon deferrals or omissions for the years
2009 and 2010 under the agreement with the European Commission in the
context of the approval for state aid that has been or will be given to
1) The Tier I instruments (silent partnership certificates) issued by
Commerzbank Capital Funding Trust I, II and III were downgraded
to B2 from Ba3, reflecting Moody's revised expectation of likely
to be missed coupons for 2009 and 2010. All instruments have distributable
profits (balance sheet) coupon non-payment triggers and are non-cumulative.
The rating agency recognises that substantial reserves are available on
the non-consolidated balance sheet of Commerzbank AG (which will
be well in excess of EUR9.0 billion following planned recapitalisation
measures in 2009) that principally offer a buffer to trigger breaches.
However, Moody's understands that these are unlikely to be
used for reversal to ensure interest payments for the next two years.
2) Commerzbank's deeply subordinated upper Tier II instruments ("Genussscheine")
that mature in December 2009 were downgraded to Ba3 from Ba1 and those
that mature in December 2010 to B2 from Ba3. The Ba3 ratings reflect
Moody's current estimate of non-payment of the final coupon,
but no principal write-down for the year 2009. The B2 ratings
reflect the rating agency's assumption of the omission of two coupons
that will come due before or at final maturity. Although these
instruments are cumulative, the relatively short time-to-maturity
is in Moody's view unlikely to allow enough time to generate sufficient
profits to pay deferred coupons.
3) The non-cumulative Tier I hybrid instruments (silent partnership
certificates) issued by Dresdner Funding Trust I, II, III
and IV were downgraded to Baa3 from A3, which continues to recognise
their very weak coupon non-payment triggers, but also reflects
the heightened risk that even these instruments could potentially be subject
to coupon omissions for the years 2009 and 2010. Based on issuer
feedback, Moody's understands that the 4% and 8% regulatory
capitalisation triggers were not breached in 2008 and coupons are paid
accordingly. While the regulatory capital ratios of Commerzbank
will be the reference for these instruments going forward, which
should translate into a low probability that the triggers will be breached,
Moody's factors in an increasing probability of regulatory intervention
which may be determined in light of Commerzbank's actual performance
over the next two years.
4) The Tier I instruments issued by HT1 Funding Trust GmbH, which
represents a "repacked silent participation" in Dresdner Bank AG,
were affirmed at Ba2. This reflects Moody's unchanged assumptions:
(i) the occurrence of a trigger breach in 2008 (the distributable profits,
i.e. 'balance sheet'-coupon non-payment
triggers were breached) and the resulting partial loss of the coupon and
principal write-down for 2008, which amounted to 15.75%;
(ii) that the principal will be written back on a five-year time
horizon since the security has a perpetual maturity; and (iii) that
the coupon payment for 2008 will be made for 84.25% thanks
to the indemnity of Allianz to pay coupons on the (remaining) principal
amount of the underlying silent participation.
Moody's understands that Allianz's obligation to pay coupons on these
instruments when coupon non-payment triggers are breached will
continue even after the merger of Dresdner Bank with Commerzbank and will
remain in place for the life of these instruments. However,
as is typical for Tier I instruments, the coupon payments are non-cumulative,
and therefore those parts of coupons that are not paid (corresponding
to the proportion of the principal written down) will be lost and not
subject to payment at a later date.
5) The dated upper Tier II securities (profit participation certificates)
issued by UT2 Funding plc, Ireland, were also affirmed at
Ba2, reflecting (i) the occurrence of a trigger breach in 2008 and
the resulting deferral of one full coupon and principal write-down
for 2008, which amounted to 15.75%, (ii) coupon
deferrals for 2009 and 2010, but no principal write-downs,
and (iii) Moody's expectation of a high probability that the coupons
will be paid retroactively before maturity in 2016 thanks to the cumulative
nature of these instruments.
6) The Tier I instruments (trust preferred securities) issued by Eurohypo
Capital Funding Trust I and II were downgraded to Caa1 from B2,
reflecting Moody's view of a higher probability of a depletion of
reserves on the unconsolidated balance sheet of Eurohypo (which are considerably
lower than those of Commerzbank) and resulting likely trigger breaches
that Moody's considers possible will result in the loss of two or
more coupons on a five-year horizon. Moody's applies a high
probability to the loss of two coupons and a medium probability to the
loss of a third. As coupon payments are non-cumulative,
they would not be subject to payment at a later date.
7) The upper Tier II instruments ("Genussscheine") issued by Hypothekenbank
in Essen (which was merged onto Eurohypo in Q3 2008), to B3 from
Ba1, as these instruments will mature in 2009 and 2013, respectively.
For the instrument due in 2009, Moody's expects a (final)
coupon loss and a reduced principal repayment at maturity. The
Genussschein due in 2013 is exposed to the risk of further coupon deferrals
and principal write-downs in 2010 and beyond, however this
is partly mitigated by the possibility of a principal write-up
and repayment before maturity due to the cumulative nature of the instrument.
The outlook on all these instruments is stable as the ratings are based
on an expected loss calculation and are not notched off from the senior
unsecured debt ratings of Commerzbank and Eurohypo.
RATING HISTORY AND MOODY'S METHODOLOGIES
The last rating action on Commerzbank was on 2 March 2009, when
Moody's downgraded the BFSRs of Commerzbank, Dresdner Bank and Eurohypo
and affirmed their senior unsecured debt and deposit ratings at Aa3 for
Commerzbank and Dresdner Bank and at A1 for Eurohypo, at the same
time changing the outlook on these ratings to negative from stable.
In addition, various hybrid ratings of instruments issued by Commerzbank
and its subsidiaries were downgraded, as outlined in the respective
The principal methodologies used in rating the entities of Commerzbank
Group are "Bank Financial Strength Ratings: Global Methodology",
"Incorporation of Joint Default Analysis into Moody's Bank Ratings:
A Refined Methodology" as well as "Guidelines for Rating Bank Junior Securities",
which can be found on www.moodys.com in the Credit Policy
& Methodologies directory, in the Ratings Methodologies sub-directory.
Other methodologies and factors that may have been considered in the process
of rating these issuers can also be found in the Credit Policy & Methodologies
Domiciled in Frankfurt, Germany, Commerzbank reported,
based on preliminary financials, total assets of EUR625 billion
as at 31 December 2008 and a pre-tax loss for the year of EUR403
Headquartered in Eschborn, Germany, Eurohypo is a fully owned
subsidiary of Commerzbank. Based on preliminary results at the
end of 2008, Eurohypo reported total assets of EUR292 billion and
a pre-tax loss of EUR1.4 billion for the full year.
Vice President - Senior Analyst
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades various hybrid ratings of Commerzbank Group entities
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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